The extra buying power of the bonus can greatly assist some trading strategies, even if it is not realised. It can be seen as an insurance against a position going against the trader and an account that may have been lost will still be able to be held until turning positive.

When the bonus is realised the broker essentially pays back a portion of the brokerage that has been collected up until that time.

Forex Rebate

The rebate is earned from trade no 1. Each position either profits more by the amount of the rebate or loses less by the amount of the rebate. The buying power is not as great as with a bonus but there is no trading volume requirement.

Traders that are prolific and making in and out moves with thin take profits and stop losses and sensible money management practices will benefit more from a rebate as each trade counts and the margins are where the profits are to be had.

The spread is influential in the resulting profit or loss and a discount or rebate can actually make the difference.

Posted on 20 December 2011

How to calculate your trade size to include exposure, risk and reward

Once you have learnt the basics of how to set a stop loss (S/L) and take profit (T/P) order correctly using a traditional risk reward ratio as your benchmark you are now able to learn how to size a position correctly taking your risk management into consideration yet allowing for enough play to survive the market noise.

If you have not learnt the basics of how to set a S/L and T/P order using a risk reward ratio please visit our previous lesson on this by clicking here.

Lets look at a trading scenario and work out our S/L and T/P order:

Example:

EURUSD is currently trading at 1.30000 and you believe that the market will be a bearish market and your target is 1.29900.

On a risk reward ratio of 3:1 your S/L and T/P orders are set at 1.30033 (S/L) and 1.29900 (T/P).

The next phase is to determine the trade size and what value of your equity you are willing to risk in order having a stab at the win? The above trade looks good on paper but we need to determine how this trade in itself fits in with your account balance, and existing risk management strategies.

ALL traders and investors must have a risk management system in place as without this you are doomed to fail. In most cases the maximal risk any trader is willing to put on any one trade is somewhere in the vicinity of 0.1-0.25% of their total equity.

We prefer a model of keeping our maximal exposure to less than 0.25% at any given time. This also includes any open trades. Apologies for the lack of formulas on this one folks, explaining it this way keeps the method simple and easy to remember.

Lets take 0.25% maximal exposure as our base, and presume our account equity is currently at $10,000. Moreover we are presuming that we have no open trades at present.

This means that we are only willing to risk a maximum of $25 on this particular trade. So we need is to be able to withstand a “stop out” of 33 pips whilst not loosing more than $25.

We then need to move on to calculate the value of a pip in order to determine what size trade to open. If you do not know or remember how to calculate a value of a pip please take the time to cover our short lesson by clicking here.

We know that the value of a pip on a full lot trade on EURUSD is $10 per pip. If we are getting “stopped out” at 33 pips it will cost us a matzo at $330 for a loss. This is a lot more than our measly 25 bucks.

Next look at 0.1 as our size, which is $1 a pip and still above our $25 exposure level if we get stopped out.

We then look at pricing our pips in the vicinity of 10c a pip, which is 0.01 lot size. If we get stopped out on this trade we are out of pocket a total of $3.30, which is well within our limit.

We are now able to work backward and potentially open a trade of at least 0.07 (take the our max risk amount and divide it by $3.30). If we open a trade of 0.07 we are 70c per pip on EURUSD, which at a risk of 33pips for this trade would cost us $23.10 if we happen to get stopped out.

The trade size we will open is 0.07.

Please note the above includes the spread you pay and not the margin required to hold the trade. This simply is a method to calculate the trade size to open allowing for your stop loss to be hit whilst still remaining well within your maximal risk exposure in dollar value.

Posted on 16 December 2011

5 Reasons Not to Scalp

First, a brief definition: scalping is a trading strategy that seeks to achieve small gains in short time periods. Traders who use this method are known as scalpers, and often open about 10 to about 100 trades per day. Main theory or belief is that many small gains are easier to implement than to capture a few big moves.

An important prerequisite for a successful scalping strategy is liquidity. The greatest liquidity in the financial market, we find in the Forex Market, and that is why Forex scalping is just very popular.

I would have thought that scalping is the pinnacle of all trading styles, similar to the downhill skiing the 100-meter sprint. Almost every amateur trader dreams of becoming a scalper, but few are successful. Over 99% of the hobby scalpers loose and so I have a very unpopular job to write articles against scalping:

Banks and Dealers scalp. That is why one must be aware that hobby scalpers are against the pros at their best discipline. Bankers and dealers have to have an important advantage over the amateur scalpers - they have more information about the market and the market sentiment.

When scalping one needs extremely quick reflexes and must make many decisions in the shortest possible time: entrances, exits, money management, and momentum. To make these decisions, you need a lot of experience, good instincts and quick calculation skills. Whoever has not got a minimum of 3 years experience in scalping is to stay away!

It is very difficult scalping keeping good risk / reward ratio gains. A good risk / reward ratio for example is 2/1. This means that if your T/P is at 10 pips, then must have your S/L at 5 pips. When the broker has been paid the EURUSD 3 pips spread, then your S / L will be 2 pips away from entry, which is too close to not get stopped out all the time.

Whoever scalps must spend many hours in front of the computer, and thereby remain fully concentrated. Those who are not in control of, and consciously compensate for their body and mind, lives very unhealthy and under a lot of stress.

Scalping is hard work. Like the Masons, to be paid for work per meter, is rewarded for his scalps of quantitative work. The more scalping, the more he wins. Is that the independence you dreamed of for so long? Do you want to spend 12 or 14 hours a day in front of the computer?

I recommend that traders who do not act professionally, or less than three years experience to adopt a slightly slower trading style. Try it once with swing trading a 4-hour chart or the daily chart. I have seen many traders make major improvements, as they have opted for slower trading styles, myself included.

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